‘Buy Now, Pay Later’: What is it, and how does it affect customer protection?
Authors:
Deepti George
The idea of suitability assessment for life insurance was first proposed by Insurance Regulatory and Development Authority of India (IRDAI) in 2012. This proposal stemmed from a 2010 discussion paper acknowledging the need for a set of standards and procedures for Need Analysis for sale of life insurance products. Ever since then, the IRDAI has been subjected to criticism from life insurance companies questioning the feasibility as well as the necessity of these moves. This blog post, which is the first of a two-part series, aims to trace the history of IRDAI’s regulations regarding suitability assessments for life insurance. The second post undertakes a comparative analysis of how life insurers have interpreted and acted upon these regulations to become compliant.
2012 – Suitability Index proposal: In June 2010, the IRDAI had released a draft in the form of a discussion paper on the need to prescribe standards and procedures for Need Analysis for sale of life insurance products. Following this, in January 2012, a draft guideline was issued to life insurance companies directing them to develop and implement a Suitability Index – Prospect Product Matrix[1]. The Suitability Index was supposed to act as a tool to assess whether the sale being proposed to a customer is based on the Needs Analysis or not. As part of these guidelines, it was made mandatory for insurers, agents and brokers to collect suitability information[2] from a consumer before making a product recommendation. Further, the guidelines also proposed a standard Proposal cum Need Analysis form to be adopted by all life insurance companies.
2013 – IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013): Upon receiving comments and feedback from stakeholders on the 2012 draft guidelines, the IRDAI in 2013 introduced the IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013 (herein after referred to as the Regulation). The objective of the Regulation was to provide life insurance companies with a standard proposal form that would capture specialised, product specific and risk-category specific information from the prospective customer. This was an effort to ensure that all the relevant information to assess the customer’s needs is available before any recommendation is made. The information collected through the standard proposal form included personal details of the customer, identification proof, details of existing insurance, family details, employment related information, physical/medical information etc[3]. The Regulation was to be implemented from August 2013 but was later deferred to be made applicable from April 1, 2014[4].
2014 – Pause on the implementation of the Regulation: In January 2014, upon receiving objections and critical comments from insurance companies on the Standard Proposal Form for Life Insurance, IRDAI decided to defer the implementation of the Regulation indefinitely[5]. This was done to facilitate a more comprehensive discussion on the particular sections of the Regulation that were objected to. Insurance companies had argued against the need for a lengthy standard proposal form since they already had internal procedures to ensure that the products being sold were specific to the customers’ needs. Besides this, there were multiple other concerns about the form. For example, the insurers pushed back on the single standard form citing concerns that it may not suit all types of products, there are huge costs involved in recasting all the existing proposal forms and insurer systems etc[6]. Thus, the Regulation was put on hold until the time these concerns were addressed.
2018 – Retraction of the Regulation: In 2018, IRDAI published an exposure draft on repealing the Regulation[7]. The exposure draft mentioned that IRDAI had concluded, based on the critical feedback received from insurance companies, that since life insurance companies were already required to file proposal forms with IRDAI and get them reviewed at the time of product clearance, and since they have been customising proposal forms for specific products, a uniform proposal form or all companies and products would serve no useful purpose and hence it was proposed that the Regulation be repealed. The IRDAI (Standard Proposal Form for Life Insurance) Regulations, 2013 was hence repealed in February 2018[8].
2019 – Re-introduction of suitability assessments: In September 2019, the IRDAI issued a new circular[9] regarding benefit illustration and other market conduct aspects directing life insurers (or agents or intermediaries) to collect suitability information from every customer and to make product recommendations based on such information. According to the circular, the suitability information to be collected includes age, income, family status, life stage, financial and family goals, investment objectives, insurance portfolio already held etc. In determining the suitability of a product for a particular customer, insurers are required to consider the customer’s risk profile, financial situation and insurance and investment objectives. Further, the suitability information thus collected shall be preserved by the insurer for future inspection purposes.
The IRDAI has faced significant hurdles in the form of pushback from life insurance companies regarding implementation of suitability assessments. However, by making suitability assessments mandatory through the 2019 circular, it has taken a significant step towards protecting the interest of the retail customer and achieving the goal of suitability.
Given this background, in the next post, we explore whether there are differences in the manner in which life insurance companies have interpreted the 2019 circular and updated their sale processes.
[1] See “Exposure Draft on Guidelines on Prospect Product Matrix for Life Insurance”, (IRDAI, 2012). Accessible at: https://www.irdai.gov.in/admincms/cms/whatsNew_Layout.aspx?page=PageNo1606&flag=1
[2] Under these guidelines, suitability information included details of (a) age, (b) annual income, (c) financial resources used for funding the purchase of the life insurance product, (d) Intended use of the life insurance product, (e) Financial objectives with time horizon, (f) Existing assets including investment and life insurance holdings, (g) Liquidity needs, (h) Liquid net worth, (i) Tax status, (j) Risk tolerance, (k) Such other information used or considered to be reasonable by the insurer in making recommendations to the consumer.
[3] See Annexure A of Insurance Regulatory and Development Authority (Standard Proposal Form for Life Insurance) Regulations, 2013. Accessible at: https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo1924&flag=1
[4] See “Irda defers Standard Proposal Form norms”, January 2014, Business Standard. Accessible at : https://www.business-standard.com/article/finance/irda-defers-standard-proposal-form-norms-114013100026_1.html
[5] ibid
[6] See “Exposure Draft on repealing of IRDA (Standard Proposal form for Life Insurance ) Regulations, 2013”. Accessible at: https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo3367&flag=1
[7] Ibid.
[8] See “Insurance Regulatory and Development Authority (Standard Proposal Form for Life Insurance) (Repeal) Regulations, 2018”. Accessible at: NOTIFICATION (irdai.gov.in)
[9] See IRDAI’s Circular on (a) Benefit illustration and (b) other market conduct aspects. Accessible at: https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo3909&flag=1
Cite this item:
APA
Tiwari, A. (2021). Tracing the History of IRDAI’s Regulations on Suitability and its Interpretations by Market Participants – Part 1. Retrieved from Dvara Research.
MLA
Tiwari, Anukriti. “Tracing the History of IRDAI’s Regulations on Suitability and its Interpretations by Market Participants – Part 1.” 2021. Dvara Research.
Chicago
Tiwari, Anukriti. 2021. “Tracing the History of IRDAI’s Regulations on Suitability and its Interpretations by Market Participants – Part 1.” Dvara Research.
